Bonds don’t always behave as their risk profile should dictate – Marty Fridson column
The expectation that higher-risk bonds will outperform lower-risk bonds in a scenario of declining risk is often refuted by the evidence. What causes this counterintuitive behaviour?
Uncertainty is a constant in corporate bond management. With nasty surprises frequently emerging from central bank policy statements, corporate earnings reports, and Mother Nature’s furies, it is comforting to know there are a few things you can depend on. For instance, if credit risk declines, higher-risk bonds will outperform lower-risk bonds. To capitalise on that law of nature, you need to rank bonds by risk, which leads to a second sure thing: the market is a keener judge of risk than
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